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Ray Dalio says we need to reform capitalism to make it work for everyone

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Dalio says the combination of debt, a large wealth gap and an economic downturn create instability that history has shown leads to extreme conflict. Kimberly White/Getty Images for TechCrunch

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On the “Marketplace Morning Report,” we’re asking people with diverse perspectives what should change in a post-pandemic economy.

Here’s our conversation with Felicia Wong on the prospect of a federal jobs program.

Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, sees precedents for this era that is so often labeled as “unprecedented,” and he’s worried. Drawing from history, he’s calling for structural change. The key, he believes, is reforming our current capitalist system in a way that expands opportunities and access to resources like good education.

“Sometimes, what happens is, as certain people become richer from the system, they also have opportunities to get advantages, such as educating their children better,” Dalio said. “So through history, there needs to be adjustments to that process, because, if not, then history has shown there’ll be revolutions against it.”

Dalio has been sharing his thoughts on the necessary reforms needed during the COVID-19 pandemic in his series “The Changing World Order.” He spoke with “Marketplace Morning Report” host David Brancaccio about what needs to be done to make sure capitalism works for everyone. The following is an edited transcript of their conversation.

David Brancaccio: Let’s get right to the three big forces and when you see the three of them happening at once you get very concerned that we could soon unravel. And we’re not even talking pandemic here. What are they?

Ray Dalio: Well, the first has to do with debt money and monetary policy. When you have a lot of debt, and you hit zero interest rates, and central banks try to become stimulative, they’re less effective of that, and that often causes a lot of trouble. So, right now, we’re seeing a situation where the Federal Reserve is going to produce about $8 trillion worth of money, and we have a situation where the federal government is going to give away that money, and that is one of those three factors that I think is very important in history, and very important now.

Brancaccio: Alright, so big red blinking light number one: all this debt that we’ve been covering day in, day out on the program here. Another one, big powers vying for the role of king of the world: China versus the U.S. and Europe, that’s one. But there’s a third one that really concerns you and has concerned you for a long time. This is about, what, inequality?

Dalio: Yeah, when you get a combination of a lot of debt and ineffective monetary policy, and what you’re referring to, which is the large wealth gap, and you have an economic downturn, there’s a lot to argue over. And now we, for the first time, have a power that’s challenging existing power. And this confluence of circumstances is very much like the 1930 to 1945 period and many of times that preceded it.

Brancaccio: I was going to ask, how bad do things get when those three forces line up? But you just answered it. You mean you get the 1930s leading into the 1940s and the Second World War?

Dalio: Yeah, history doesn’t necessarily have to repeat itself, but there are cause-effect relationships. So if we get down to the nitty-gritty, what we see today is that we see that there’s a lot of arguing over money, over wealth, at a time that there’s an economic downturn, at a time there’s a lot of debt and a time that there’s a rising power. So there’s a lot to argue about. And in history that’s led to conflicts.

Brancaccio: It’s led to conflict, it doesn’t have to lead to conflict, reading your study, but could. So this is, you know, big, bold warning sign that you’re putting up. But I mean, the fact that we’ve gotten to this point suggests that there’s something wrong with the system yet capitalism is something that’s worked pretty well for you personally. So is there anything wrong with it?

Dalio: I think capitalism has proven itself to be the most effective resource allocation system in the world. But at the same time, like all systems, it needs to be reformed. So what is the American dream? When we think of the American dream, I think it’s equal opportunity. And sometimes, the profit-making system just mechanistically may not improve that. Sometimes, what happens is, as certain people become richer from the system, they also have opportunities to get advantages, such as educating their children better. For example, the top 40% of the population spends, on average, five times as much money on their children’s education as those in the bottom 60% of the population, which is normal — parents want to take care of their kids, and if they have resources, they do that. But when that does that, there’s a big disparity in the quality of education. And it perpetuates the system in which there’s less and less equal opportunity. So, through history, there needs to be adjustments to that process, because if not, then history has shown there’ll be revolutions against it.

Brancaccio: That’s what you’re saying here. I mean, because you have to make a case — if you’re right — you have to make a case to powerful people who have done so well in the present system to join with you in reforming the system. They don’t seem to be in the mood at the moment. You’re trying to say, ‘Hey, take a look into the abyss. the abyss could be pretty deep if we don’t get this right’?

“I think capitalism has proven itself to be the most effective resource allocation system in the world. But at the same time, like all systems, it needs to be reformed.”

Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates

Dalio: Yeah. First of all, you can’t ever assume, take for granted, the peace and harmony that is necessary to run a democracy of being in it together, and you could have a revolution, and you could have war. And I think it’s only by worrying about such things and studying history and realizing that they could come about, and realizing how terrible they are, and contrasting that with how being in it together is, I think it’s important. I think that if it was clear, that the pie can be increased as well as divided well so that productivity can be enhanced by broadening education, for example, and bringing others into it, then other good things can come about. And I think a lot of people who are successful experienced that themselves. And I think that most of them can appreciate the opportunity that other people should have in order to make their wealth and to have the opportunities of a good life in many ways. So I think they know that productivity and opportunity go hand in hand with a good society and a good outcome for the whole, and that the costs of not having that are so very great.

Brancaccio: The other day, Ray, you and I were talking. I was trying to cajole you into doing this interview, and you said something interesting. It really gets to an answer to the question of, what is the point of the economy? You said, something like we need a system that helps us live peacefully with one another, where more can thrive. I mean, is that sort of where you want to go with all this?

Dalio: Yeah, well, isn’t our objective to work together peacefully and achieve greatness together in a broad way, like existed in the 1960s, when you’re going after the space program and the fight against poverty? Or, do you want to be fighting with each other? And, there’s enough money to go around, but in a way that more people have an opportunity to get well-educated, and be working together, and that we pull together, because I fear for us fighting with each other domestically, and I fear for us fighting with each other internationally.

Brancaccio: All right, so let’s get to how we move this forward into this brave new world. Give me an idea here: You’ve talked about education to help with this nettlesome issue of bringing more opportunity to more people. If you’re going to educate more people, it tends to, at least if you look at the spreadsheet, cost a fortune. I mean, it’s $9,000 per pupil per year in, let’s say, Maryland, $7,000 a year in Virginia and California. It’s a lot of money. But I was looking at some of your earlier writing. You think that’s not the way to look at our investment in education?

Dalio: Well, if we talk about the investment in education, that is a great investment, for example. My wife and I are involved in Connecticut to try to help underprivileged kids get through high school and to jobs. And we did the all-in calculations of this, and we could do that with a relatively few thousand dollars per student. And we’re doing that with the state of Connecticut. We’ve pledged $100 million to do that. And the cost of not having those students get through is enormous. Twenty-two percent of the high school students in Connecticut are disengaged or disconnected. Disengaged means that their absentee rate is greater than 25% and they’re failing classes, and disconnected means they’re not even attending school, they don’t know where they are. Twenty-two percent. The cost of not educating is multiples — incarceration rates, depending on where and how, is $35,000 to $120,000 a year. And it’s a terrible economic burden. So it’s very effective, very cost-effective, to provide that kind of opportunity to get past. Look, everybody has their own pet projects. I think the real question at the bigger picture is, can we specify what the American dream is? Can we measure how well we’re achieving that? And can we do that in a cohesive way? Because if we don’t do that, then we’re going to be fighting with each other, and history has shown that that fighting with each other has hurt productivity and killed people. That’s the choice that we have to make.

Brancaccio: So I heard you just say this: that the cost of not educating people is enormously high, and we don’t often factor that into our calculations?

Dalio: It’s so stupid. Because you’re not looking at the return on investment. You’re looking at a budget. Now, they look at a school budget, and they don’t think about what the cost, what the returns are. Well, if you run a business that way, it wouldn’t work. All businesses, practically, raise capital, because they can produce outcomes that are rewarding. So, if you have more income from children going to school and succeeding at school, and you have less costs for crime and so on, it’s a tremendously beneficial investment, but it needs to have capital in order to work as a return on investment. You can’t just say that it can’t have an adequate budget. This is true today. For example, in the digital divide, we’re dealing, in Connecticut, with kids who don’t have computers and they don’t have connectivity. They can’t learn. School is online. The government won’t provide it. It was necessary for my wife and I that we bought 60,000 computers for poor kids in order to do it. They don’t have connectivity. Not having connectivity today is like not having electricity 50 years ago. There are certain basics. Is that smart economically, or is it stupid economically? To me, it’s stupid economically, as well as unfair.

Brancaccio: Now I woke up in an optimistic mood this morning for some reason, and I, you know, can see that you put out this call for, “Look into what could happen if we don’t draw together, people of different ideologies, to work on these issues.” But then you look at Washington, you see all this polarization. I mean, what gives you hope that people will finally come together?

Dalio: I’m hopeful in that I think that the greatest thing that Americans have, or the greatest quality of humanity, is the capacity to adapt and invent. And I believe that if they worry about these things, they don’t have to worry. I have a principle: If you worry, you don’t have to worry. And if you don’t worry, you better worry. Because if you’re worrying, you’ll take care to protect yourself against the things you’re worried about. And so if there’s a message out there that I’d like to convey, [it’s], “Let’s worry about those things and let’s try to deal with it in a bipartisan way, and in a way which is skilled and informed.” So if you bring together skilled people, informed people who are bipartisan, and then — I don’t care — lock them up in some spot for six months and get them to work it out as to the exact hows, that would be a lot better, because there are a lot of opportunities that will provide great returns on investments and make the economy and the society more fair.

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